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Maryland’s all-payer system shows hospitals can live within their means

Health policy experts have long decried the fee-for-service reimbursement model as one of the main drivers of overuse and high health care costs. As every policy wonk knows, in a fee-for-service model, clinicians and hospitals are rewarded for delivering more health care services, regardless of whether they improve the patient’s health. Alternative payment methods such as value-based payments, bundled payments, and physician salaries are becoming more popular, but the vast majority of physician visits and many hospital stays are still paid using the fee-for-service model.

One state has bucked the fee-for-service trend.

One state has bucked the fee-for-service trend. In 2014, Maryland switched from fee-for-service to global budgeting for hospitals, so each hospital’s total revenue is set at the beginning of each year. If the hospital’s operating costs are more than budgeted, it suffers the loss. The state has the advantage of a long-standing system of all-payer rate setting, in which a state commission sets reimbursement rates so that hospitals receive the same payment for any given service from all payers.

Theoretically, global budgeting should encourage hospitals to focus on efficiency, quality, and delivering care that matters to patients’ health, including good primary care that can keep them out of the hospital. On the other hand, hospitals could simply deny or ration care as a way of keeping down costs. At the onset of this experiment the question remained – how would Maryland hospitals adapt?

How would Maryland hospitals adapt?

The results in Maryland are promising. In three years, Medicare saved $429 million in hospital spending. The rate of growth for hospital spending is well below their target of the state economy’s growth rate. And these savings aren’t coming at the expense of quality; Maryland’s rates of preventable complications and readmissions have dropped.

In 2014, when Maryland was making the switch to global budgeting, Carmela Coyle, president of the Maryland Hospital Association, predicted that in five years Maryland hospitals would look less like traditional hospitals and more like primary care providers, local health departments, or community resource centers–all of which help to reduce the need for hospitalization. It appears that hospitals are indeed moving toward Coyle’s vision. According to members of the state’s health policy commission, hospitals have been working to connect patients to primary care and treat chronic conditions proactively, to improve health and save money in the long run.

This is the kind of innovation we should be working toward.

Maryland’s all-payer model shows that there is a scalable alternative to fee-for-service that works for providers and communities. This is the kind of innovation we should be working toward.